Austin’s Coming Hotel Boom Is One of the Largest in the U.S.

Gary Dinges and Shonda Novak, Austin American-Statesman

- Oct 06, 2013 7:31 am

Skift Take

This influx of hotels was preceded by a boom in vacation rentals to meet the needs of the city’s visitors. Will other urban markets begin looking at vacation rental activity as a canary in the coal mine for new development?

— Jason Clampet

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During the past decade, downtown Austin ushered in a wave of housing with new condominium and apartment towers. Now, a tide of hotel development is sweeping the central business district that could add more than 3,200 guest rooms during the next three years, a roughly 40 percent increase over the current downtown stock of just more than 8,000.

Those numbers don’t even include the latest announcement, a project proposed by Chicago-based Magellan Development Group that could rise 35 to 50 stories with one or two hotels, plus apartments, at East Fifth and Brazos streets. And about another 1,450 rooms are in the planning stage in other parts of the Austin metro area.

The Austin area hotel market is among the strongest in the nation, making it a magnet for new development, industry experts say. In downtown alone, an occupancy rate of 78 percent explains why room rents are rising and nearly a dozen new hotels are planned or under construction.

“That’s phenomenally high occupancy and that’s a very strong market,” said Randy McCaslin, vice president of the Texas and Louisiana markets for PKF, a hospitality industry consulting firm. “You just don’t see a downtown market with that high of an occupancy that often. That tells you there are very few days during the year when the hotels are not full.”

Austin and Houston rank as the two strongest hotel markets in Texas, McCaslin said, and are among the top five in the nation.

In Central Texas as a whole, the hotel occupancy rate is projected to be in the 70 percent range for the next four years, “and that’s really strong,” McCaslin said. “Anytime it hits above 65 percent, you should expect to see new development.”

Austin, one of the nation’s fastest-growing metros and one with an expanding labor force, is seeing continued strong hotel demand from a number of conventions and conferences, and from popular annual events like South by Southwest and the newly expanded Austin City Limits Music Festival. New attractions like Formula One and other racetrack events are adding to the visitor count, and the X Games scheduled to debut in 2014 will bring even more.

Downtown, the largest project under construction is a 1,012-room JW Marriott convention hotel that will rise 34 stories at Congress Avenue between Second and Third streets.

A Westin Hotel broke ground last month along East Fifth Street, the 16-story Hotel Van Zandt is under construction in the Rainey Street area and a Hotel ZaZa is due to break ground by year’s end on West Fourth Street in the Warehouse District. A $52 million project that will have a 164-room Holiday Inn Express and a 134-room Hotel Indigo, a boutique brand, is due to start in December at Red River and East Ninth streets across from Stubb’s.

And then there’s the Fairmont, a premier brand that plans to make its second Texas appearance with a $350 million convention hotel that would tower 580 feet at Red River and East Cesar Chavez near the Austin Convention Center.

That project just reached a major milestone when the city issued a site development permit, said Douglas Manchester, president of the hotel’s developer, Manchester Texas Financial Group. With permit in hand, “our architects are deep into creating the final designs,” Manchester said. “This puts us on track to break ground in January and open in the fall of 2016.”

The hotel will have 1,035 rooms — including 125 ultra-luxury Fairmont Gold rooms ; 90,000 square feet of convention center space; a sky deck with views of Lady Bird Lake and the Capitol and a 555-space underground garage.

Some market observers have questioned whether there’s sufficient demand for two additional convention hotels, saying it could be detrimental to the market by pulling demand from other hotels.

“It has been no secret our demand has outgrown our supply, particularly in the downtown area and as a result of that we have seen groups go elsewhere,” Lander said. “As a matter of fact, we can attribute approximately 25% of our lost business is due to not having adequate hotel space.

Lander said the Convention and Visitors Bureau can already “directly correlate a significant increase in convention opportunities to the new JW Marriott project. Over 50 percent of the groups that we have booked in conjunction with that property are groups that previously would not have considered Austin.”

A market analysis performed for Manchester by Hospitality Valuation Services found that from 2006 to 2012, Austin lost an average of more than 1.3 million hotel room nights a year because of a lack of room supply downtown. Manchester said the Fairmont can also help fill the void.

McCaslin said the latest wave of hotel development isn’t surprising given downtown, and the region’s, high occupancies. Even among the region’s upper-priced full-service hotels, occupancies are strong, projected to hit about 76 percent for 2013, according to PKF’s Hotel Horizons Report, which uses Smith Travel Research data.

“That’s huge. That’s unbelievable,” McCaslin said. And even the region’s lower-priced hotels are performing well, with a projected rate for 2013 of nearly 66 percent, all of which helps explain the flurry of development.

On downtown’s eastern edge, the 322-room Hotel Van Zandt — a project delayed when financing dried up during the recent economic downturn — started construction two months ago and will be open in time for the SXSW festival in 2015, said Greg Clay, chief investment officer for the developer, JMI Realty LLC. San Francisco-based Kimpton Hotels & Restaurants will manage the $90 million hotel.

“The Austin market continues to be very strong,” Clay said. “Hotel revenues are up over 12 percent year over year, indicating that demand is continuing to rise and the market will likely be able to absorb the new hotel rooms that are under construction.”

“An influx of any new inventory obviously will have to be absorbed by the marketplace,” said Lander, of the Convention and Visitors Bureau. “We believe that our growth year over year in demand, averaging 5 percent for the last 10 years, will help offset any absorption challenges.”

Magellan also is bullish on Austin, a market it is entering along with Miami, Minneapolis and Nashvillle after making a name in high-rise development in Chicago. Magellan’s site, at Fifth and Brazos, is walking distance to shops, hotels, restaurants, bars and live music venues.

“We identified Austin as one of the nation’s most dynamic and fastest growing cities with a young, educated and vibrant population,” said David Carlins,president of Magellan Development Group, which will partner with Wanxiang America Real Estate Group on the project. “We chose to develop a multi-use tower containing rental apartments as well as hotel, which will be unique to the Austin market. We feel there is a demand for additional rental units and hotel rooms as downtown occupancies have remained consistently high. We hope that this will be the first of many projects in Austin.”

McCaslin said he thinks lender caution will keep the market from getting overbuilt.

Clay echoed that sentiment.

“New hotels are being talked about all the time, but until we see a shovel in the ground, I don’t count them as competition,” Clay said. “Hotels are still difficult to get financed. It takes a pretty strong balance sheet, and a lot of equity to develop a lodging facility with enough rooms that it will impact the market. I think Austin will be in great shape for at least the next five years.”

On the Way

A look at some of the hotels that have been proposed or are under construction in the Austin area. Under construction or set to begin construction this year: